Europe News

US Downgrade 'Absurd': Economist

Standard & Poor'sdowngrade of the US' credit rating from AAA for the first time in history, on Friday, was "absurd", Richard Portes, professor of economics at the London Business School, told CNBC Monday.

"The downgrade is absurd in that default ratings are supposed to result in default… It's not possible that the US will default on its debt ," he said.

He is far from the only critic of the widely-anticipated move.

Treasury Secretary Timothy Geithner told CNBC Sunday that the decision was based on a "lack of knowledge" about the nation's finances.

"S&P has shown really terrible judgment and they've handled themselves very poorly," he added in an attack on the ratings agency," Geithner said.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement following the downgrade.

"This is a big symbolic moment," Sir John Gieve, the former Deputy Governor of the Bank of England, told CNBC Monday.

"It definitely increases the sense of uncertainty and lack of confidence."

Rival agency Moody's on Monday kept the US' credit rating at its top rating but warned it could downgrade the world's biggest economy before 2013 if the fiscal or economic outlook weakens significantly.

The US now has to enact a planned $1.5 trillion in budget cuts, which a cross-party committee has pledged to find.

"They need a long-term plan to deal with the deficit but you could deal with it by cutting back growth in healthcare expenditure and letting the Bush tax cuts expire," said Portes.

Over the weekend, renewed doubts about the survival of the US dollar as the world's reserve currency emerged after Guan Jianzhong, chairman of Dagong Global Credit Rating, told CNBC the currency will be “gradually discarded by the world,” and the “process will be irreversible.”

"This is part of a new equilibrium between the US and China," Jean-Paul Pierret, Strategist, Dexia Securities, told CNBC Monday.

"We (in Europe) are in the middle of this exchange."

He was optimistic about the survival of the dollar.

"It takes a very, very long time to change the status of a currency and the status of the dollar is so long and so old that it would be very difficult to change it," he said.